Apple’s $1bn Settlement: a New Innovator’s Dilemma

Apple’s $1 billion patent infringement victory against Samsung raises a number of increasingly pressing issues about innovation in the consumer technology space. There is no doubt that Apple has done more than any other single company to shape the smartphone marketplace. It is also clear that the average smartphone form-factor and feature set look dramatically different post-iPhone than they did pre-iPhone. And there is an argument to be had that those same form factors and feature sets bear more than passing resemblance to the iPhone. But this raises the issue of where the ‘a high tide raises all boats’ market evolution argument stops and the patent infringement one starts.

Samsung is the Buffer State in Apple’s Proxy War with Google

Apple’s case against Samsung was in effect a proxy war against Android. Samsung became the target because it was doing a better job of making Android compete against Apple than anyone else. While competitors like Nokia and HTC have laundry lists of product names and numbers, Apple’s elegantly simple iPhone brand cuts through the smartphone name clutter like the proverbial knife through warm butter. Among numerous other factors Samsung recognized the supreme value of establishing such clear brands (such as the Galaxy) and pivoting their portfolio around them. Samsung became competitor #1, the Android success story, racking up a 50% share of the smartphone market in Q2012 according to IDC, which compares to just 17% for Apple.

The final impact of the ruling is yet to be seen, with countless potential challenges and subsequent actions likely to come. There are also interesting geopolitical issues at stake, not least of which is the degree to which a Californian jury and judge will be perceived on the international stage as having the requisite impartiality to rule upon competition between a South Korean and a Californian based company. But leaving aside the legal permutations for a moment, let’s instead take a look at the known unknowns and their likely impact on the marketplace:

Competitive patent strategy. Over the last couple of years we have seen an acceleration of the use of patents in the consumer technology and Internet arenas. Patents have quickly become established as an extra part of competition strategy among big technology firms. Now, instead of just relying on product development, marketing, pricing and positioning technology, companies can use patent claims to help strengthen their position at the direct expense of the competition.

Patent arms race. With the rise of patent trolls (companies’ whose sole objective is to acquire patents and then try to sue established companies for patent infringement) the big established companies themselves have started to acquire patent arsenals. For example, earlier this year Microsoft paid AOL $1.1bn for 925 patents, 650 of which it promptly sold to Facebook for $550m. Before that, in 2011, Microsoft teamed up with long-time rival Apple as well as with just about anyone whose anyone in the smartphone business who isn’t Android (RIM, Sony, Ericsson et) to spend $4.5 bn on 6,000+ patents from bankrupt Canadian teleco equipment maker Nortel. Google had been on the other side of the bidding war and lost out with what was seen by some as a whimsical bidding strategy. Google promptly went onto to buy fading handset manufacturer Motorola for $12.5bn, a company that just happened to have c.17,000 patents in its archives. There are uncanny echoes of the Cold War with both sides stockpiling nuclear weapons. The difference here is that the arsenals are being thrown straight into battle rather than being held back for fear of Mutually Assured Destruction.

Patents no longer fit for purpose? Patents raise as many questions as they provide answers for in the software and technology spaces. Not only are they subject to legal challenge, the language used in them is often inadequate. What gives a piece of technology competitive edge is not having rounded corners, but the digital mechanics underneath the hood. It is the code inside a piece of software that gives it edge, not the broad user behaviour it supports. That’s why we have market leaders in software and product categories that are crowded with lesser competitors that support the same basic user behaviour. And yet patents focus on the exact opposite of this equation. Patents are typically vaguely worded affairs that talk about broad behaviours such as “a system for controlled distribution of user profiles over a network” (taken directly from a patent which forms the basis of Yahoo’s case against Facebook). Even the more detailed patents – such as Apple’s recent Haptics filing – have a procedural focus. And of course they have to. Patent applications are exactly that: applications. There is no guarantee they will be granted and so a filing company is going to be as secretive as they possibly can rather than give its competition edge. But even if there was a guarantee there is no way in which a technology company is going to publish its source code on a publically accessible document.

And therein lies the problem, if a company is not ever going to include the secret sauce which gives its product the real edge, then what is a technology patent really going to be able to definitively cover? If it inherently comes down to a discussion about supporting usage behaviours then we end up with an unusual and potentially restrictive lens placed upon innovation and invention. The history of innovation and invention is that when something comes along that is good enough, it permeates through the entire market. Sometimes this involves licensing of patents, more often than not it happens through creating similar but different inventions. Think about any consumer electronics purchase, whether that be a digital camera, a laptop or a TV: the products all have pretty much the same mix of features and form factor in their respective price tiers. This is what has happened to date with smartphones.

However if the Apple ruling survives all challenges and is then extended it could have the effect of a forced and artificial split in innovation evolution. Instead of the touchscreen smartphone becoming another step on the innovation path it could become the sole domain of Apple and force the competition to pursue entirely different evolution paths. Now there are obviously both positive and negative connotations of that. But whatever your view point, it will be dramatically different from how other consumer electronics product categories have evolved.

With its origins in early 18th century England, there is an increasingly strong case for a major review of the global patent system and whether it is the right tool to strike an appropriate balance between protecting intellectual property and fostering innovation in the 21st century consumer technology marketplace.

Who’s Competing with Who?

An interesting post-script to the Apple-Samsung case is looking at who else will potentially benefit other than Apple. Right now there will be a host of handset manufacturers who will be hurriedly looking for a Mobile OS Plan B. An uncertain Android future doesn’t leave them many places to turn to other than Microsoft’s Windows 8. Historically no friend of Apple but these days of course part of Apple’s Patent Pact. How long that alliance will remain intact remains to be seen, though a cynic might argue that Apple would leave it in place just long enough for Microsoft to get enough of a foothold to fragment the OS marketplace before it renews hostilities between Cupertino and Redmond. By which stage Apple could have billions worth of patent settlement dollars to wage war with…